Beyond Cost Plus Summary: July 2015

Jul 31, 2015

The problem with cost plus, aligning prices with value, how retail floral is already halfway there, and using discounting to get the rest of the way.

Early this month was the last of three webinars for SAF. This one was called You Don't Take Margin to the Bank and looked at when, and how, margin should be sacrificed to increase sales and profits. Florists are often told that margin is sacred, that it can never be sacrificed, but discounting (even when it means lower margins) is the secret weapon of some of the most successful florists out there.

Why discount? That was a big part of the webinar, and also the subject of another post. The goal of discounting is to change buying behavior. In the flower business we want the customer that buys once or twice a year to buy three or four times a year. We want the customer that normally buys one dozen roses to buy two dozen roses.

The "how" is by better aligning the prices charged with the value the customer places on the product. We have to be realistic and accept that twice the flowers do not provide the pleasure. Flowers, as wonderful as they are, offer diminishing marginal utility. Each additional flower provides a little less enjoyment than the one that came before it.

Trying to upsell the one dozen customer on a second dozen is much, much harder when stubbornly clinging to full margin, and this isn't what we see elsewhere. Generally vendors of perishable products that offer diminishing marginal utility offer aggressive discounts on larger pack sizes of those products. For example – the extra soda or popcorn in the medium and large sizes comes at a fraction of the cost of the small size.

Nobody likes sacrificing margin but discounting to make a bigger and more profitable makes more sense than maintaining margin and making a smaller, less profitable sale.

Customers also place different values on flowers at different times of the year. On a birthday or anniversary the average customer is likely to place a higher value on flowers and be willing to pay full price.

That same once or twice a year customer is much less likely to pay full price on just any old Wednesday. To change their behavior and get them to purchase the vendor needs to understand that and price accordingly. Restaurants get this – they know most people don't want to eat out 4:30 so they have early bird specials to compensate.

Of course retail floral does get the other side of things right. A large percentage of customers place a much higher value on roses at Valentine's Day, and they are willing to pay more. This means that growers can (and have) raised their prices and florists have to follow along.

This is often attributed to "supply and demand" but flowers are not rice or gasoline. They are not an essential staple that with an inelastic demand curve – if the price is too high people simply won't buy them. What matters with flowers is how customers value the product and how much they are willing to pay.

This of course is the big problem with the cost plus pricing model, as discussed in another post. The customer is not interested in the sellers costs. Sometimes that works against the seller, but it can also work for them. Sometimes the customer is willing to pay more than a cost plus formula would suggest.

Sponsored by FloristWare – Independent Florist Software

Beyond Cost Plus is sponsored by FloristWare. POS software for florists doesn't have to come from a wire service. It doesn't have to cost a fortune. And independent POS does not have to be a compromise.